Ever since the dawn of human civilization, one of the greatest challenges of our species has been to find enough energy sources to fuel growth and progress. We still face that challenge today as we look to find a way to power a global population that just passed 7 billion. It's almost impossible to forecast global energy demand, but Exxonmobil's (NYSE:XOM) recent prediction in its 2014 Energy Outlook seems very peculiar. The world's largest publicly traded energy company estimates that total energy consumption between now and 2040 will grow by only 35%. Seems pretty low, doesn't it? Let's take a deeper look at Exxon's theory and what it could mean for the outlook for energy.
Getting a lot more bang for a buck
At first glance, its pretty easy to look at a 35% increase in global energy demand and think it sounds like a very reasonable number. As you dig deeper into the numbers, though, something doesn't feel right, and it's also much lower than most other forecasts. The U.S. Energy Information Administration estimates that global energy demand will climb by 60%, and even competitor Royal Dutch Shell's (NYSE:RDS-A) most conservative estimates in its New Lens Scenarios forecast sees demand increasing by at least 52%.
The biggest reason Exxon sees such a modest growth in global energy demand is because of a massive shift in energy conservation and investments in greater efficiency. In this forecast, Exxon assumes that global GDP will double from $63 trillion in 2010 to more than $120 trillion by 2040. Breaking that down, that means each thousand BTUs -- a measure of energy -- produces about $0.12 of global domestic product. In 2040, that same amount of energy will produce $0.18 worth of global output, a near 50% increase in efficiency.
These large gains in efficiency are where Exxon's forecasts change from those of others. According to Exxon, energy consumption per household in OECD countries is expected to decline by 25%, and the average consumption for a vehicle worldwide will jump from 24 miles per gallon to about 42 miles per gallon thanks in most part from hybrid vehicles becoming more than 35% of the global automobile market.
From forecasts to investment decisions
Like I said, forecasts like these are very difficult to make and, for the most part, what conspires is rarely what these forecasts say. These forecasts can also drastically change in a matter of a few years. In the International Energy Agency's world outlook for 2007, it estimated that global energy demand would reach 17.1 billion metric tons of oil equivalent per year by 2030. Compare that to its 2013 estimate of 14.9 billion metric tons by 2035. In a matter of five years, changes in economic trends and advancements in technology resulted in a 13% reduction in estimated energy demand. So, these numbers can be taken with a grain of salt.
But big energy companies like Exxon and Shell don't do these outlooks and projections for nothing. These publications can actually be helpful in understanding a company's strategic vision for the years to come. Over the past couple of quarters, we have seen almost all of the major oil companies say that they plan to wind down their capital spending programs from their recent highs. Some may attribute that change from investors becoming impatient with the performance of Big Oil, but these forecasts actually may be just as responsible for that as well.
If energy demand is only expected to grow on a compounded annual growth rate of only 1% over the next 30 years or so, the need to spend so much money to develop major oil and gas projects today doesn't seem as important as it may have only a few years ago. Especially since projects such as Exxon and Shell's Kashagan project and Chevron's (NYSE:CVX) Gorgon project have gone several billion over budget and are years behind schedule. So, perhaps taking a more tempered approach to production growth and saving some of these high-cost projects for down the road may be the better approach.
It's interesting to understand the correlation between forecasts and a company's investment decisions, and to see if individual investors who have an eye on very long term trends can actually make greater use of these sorts of forecasts. If Exxon's model were to hold true and energy demand were to only grow by 1% annually, here are some investing takeaways:
- Competition in the energy space will heat up: Over the past 30 years, global energy demand has grown annually by 1.98%. Also, renewable energy sources are starting to become cost competitive with fossil fuels. So, over the next few decades, a more diverse set of energy types will be fighting to capture a market that is growing slower than before.
- Conservation could be key: Exxon's projections assume that we will develop technology and practices to generate 500 quadrillion BTUs of energy savings, which is almost the amount of total energy consumed in 2010. To attain that sort of energy savings, we will need to do more than change a few lightbulbs. According to a research report by Navigant, the energy efficiency market will reach almost $90 billion by 2020.
What a Fool believes
For all we know, these projections could become useless in a couple of years if we were to make some major developments in technology. Then again, those sorts of changes would change almost anyone's investment thesis anyway. Overall, though, these forecasts can be a useful tool in helping investors shape their long-term views of the energy industry and develop an investing strategy that will reflect those views. Based on these projections, growth in the energy industry may not be as great as once thought, and it could hint at energy producing companies underperforming over a 30-year period, so build your investment thesis accordingly.
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